Friday, October 26, 2012

The Obama Economy in 2 Charts

Officially, the definition of a recession is a time when you have two consecutive quarters of negative real GDP growth. Based on that definition, this economy has been growing nicely for 13 quarters or so. But it doesn't feel like that now does it? One big reason is that while we have been growing, we haven't done anything to make up the gap in production caused by the initial recession. Take a look at this graph of real GDP (red line) versus potential GDP (blue line), where real GDP is what is reported and potential GDP is the GDP we would have if we were operating at full non-inflationary capacity.

As you can see, historically the two lines are generally pretty close. Sometimes we are above capacity (at which time we have inflationary pressures) and sometimes we are below, but generally there is a reversion to the mean. Since Obama took office, however, the lines have essentially become very separated and parallel, which is an unprecedented occurrence.

Now, let's take a look at it another way, in percentage terms:

Usually the economy operates within 2.5 percentage points of potential GDP on both sides and importantly only had one period prior to this recession where real GDP was >5% less than potential, the 1982 recession where we were at a >5% gap for a full 6 quarters. Based on this data we have had 16 full quarters of a >5% gap during the last four years (i.e. every single quarter for the last 4 years) and absolutely no sign that we are going to suddenly stop being in the horrible place we are at anytime soon.